Information technology services are by far the most common reason for outsourcing, managed services, and strategic commissioning across both the private and public sectors. In our experience, it is also one of the most contentious, being synonymous with poor service delivery, irrespective of which sector you happen to operate within. This is borne out in the fact that of the hundreds of projects we have been instructed to work on, up to 40% of our advisory work is focused on the realignment and recovery of IT outsourcing relationships that have not delivered expected organisational benefits.
Given the backdrop of significant pain we see in both private and public sector organisations that have outsourced their IT services, I find it inspirational when we come across IT outsourcing (or in fact, any business process or outsourcing relationship) that drives good value for the client organisation.
In that respect, the National Audit Office (NAO) has produced a good insight review into one such IT outsourcing relationship at a central government organisation – Her Majesty’s Revenue and Customs (HMRC). The review contains some good visibility into the inner workings and complex mechanics behind public sector contractual relationships.
Aspire is the IT outsourcing agreement between HMRC and its IT provider that covers the vast majority (84% by value) of its information and communication technology (ITC) needs. It is, we believe, the government’s largest technology outsourcing contract. It has been running for ten years so far and, adjusted for inflation, has cost taxpayers £7.9bn (taking into account likely costs over the recently agreed three-year extension to this contract, that figure is likely to rise to more than £10bn). The review undertaken by the NAO has recognised that much has been achieved in this relationship.
Highlights of the HMRC Aspire relationship
- 95% of its projects have been implemented without high-priority incidents
- 30% overhead savings achieved over the 10-year period
- Improved turnover, systems, innovations, and service levels
- And on a relative basis, just 0.16% of HMRC turnover is invested in Aspire.
For any relationship of this size, private or public sector, to have 95% of their project implementations pass without high-priority incidents is remarkable and has to be applauded. The review does indicate that there were issues along the way, but it is the relationship that HMRC and its IT provider have developed that seems to have supported such a positive outcome. The NAO report suggests three ways in which this has manifested itself:
- The “cooperative, partnering approach” they undertook,
- “…having experienced and qualified project managers”,
- and “…an extensive planning phase”.
Because of the many factors that combine to make this relationship work, HMRC has reported that over the ten-year term of the contract to date, 30% savings in their operational overheads have been achieved, and that the “projects and services provided through Aspire have been central to these improvements”. This is an impressive statistic as, from a cost-cutting perspective, it brings HMRC towards the direction of most local authorities that are very much at the coalface of austerity measures and extreme cost cutting.
Improved automation and efficiencies resulting from the Aspire relationship, higher service levels and enhanced systems, also resulted in much more effective collection of tax revenues. These stand in excess of £500bn a year.
These really are impressive numbers. In our experience, they not only rival, but surpass the results of any successful relationships in the private sector that you’d care to mention.
There is a downside to the NAO review, and a clue to this downside is in the organisation’s name. Auditors being auditors, they do have to find fault even with the most positive of outcomes. “Humbug to such Scrooge-like thinking,” we say.
In fairness, the NAO have identified some good insights that do need further diligence and resourcing by HMRC to drive even better outcomes, not only for the remaining time in which the contract will operate, but also for when it comes to an end in three years.
Issues highlighted by NAO
1. HMRC spent far more than planned
The gap between the planned spend of £3.6bn to £4.9bn and the current estimate of £10.4bn by the end of its term in 2017 is substantial and the NAO report blames this on parties taking too flexible an approach to new projects, innovations and extensions. It is unfortunate the NAO has listed these as an issue without contextualising any quantified additional financial benefits HMRC has delivered by extending the scope of the contract. From our perspective, it’s difficult to argue with the results HMRC have achieved and on this basis, why wouldn’t you extend the scope? The enablers in the technology platforms provided under the Aspire relationship have helped HMRC accomplish some exceptional results.
2. Higher than planned supplier profit margins
The report places a lot of weight on the ‘higher than usual’ profit margins achieved by the IT provider and its subcontractors. The NAO have cited the generous 16% margin in the report’s ‘Key Facts’, expanding on it at length later on. I’m sorry to be contentious, but with the evidence of the billions HMRC have saved, and in the face of the more than 60% of IT outsourcing relationships which either fail outright, or materially fail to achieve any benefits and still take twice as long to implement at over twice the previous cost of service delivery, my view is, if the provider and its contractors have earned more than planned, then that’s a win-win for all involved. Just look at the results.
Shouldn’t the outcomes, the results, the savings and earnings be more important than the spend? If an increased scope results in a far better than expected business outcome, and both parties benefit greatly from that change in scope, does that not simply make it a strong return on investment? If anything, the Aspire relationship has proven that a well-motivated partner is a more effective partner, with HMRC achieving excellent directly cashable savings, improved performance efficiencies, and innovation-led change. Most organisations would be falling over themselves to increase the scope of their IT outsourcing relationships if these were the types of results they could achieve.
3. Lack of market testing
So, OK. I do agree with the NAO on this one. And well done to them for picking up on it. In fairness, there really is no excuse for failing to adequately market test the significant changes in scope of the service. Given the results achieved from the Aspire relationship, I can see the reluctance of HMRC to go out for formal market testing for increases in scope to the service. However, they are a public sector organisation, and despite the integrated nature of the Aspire contract, we all need to know that HMRC is driving strong value in that relationship; and, that despite the impressive results being achieved, the investment being made in those scope increases offer fair value.
The NAO suggested that HMRC has already recognised that it needs to increase its resourcing in its Intelligent Client Function to keep both itself and its IT partner in Aspire, commercially tensioned to ensure public visibility of good value being achieved.
4. Contract weaknesses and deviation from current government policy
The NAO have reported that over successive contract negotiations, HMRC has traded away many of its commercial safeguards in favour of early cost savings. HMRC are in the process of correcting that position. Again, I agree that this is key. Greater resourcing and a mix of the correct skills are critical to give client-side teams the bandwidth to be able to both strategically review contract changes and provide support to the business to ensure the safeguards all remain valid, or determine whether they should be traded for others in the changing business environment they work within. As we often see, clients make short-term gains by committing to a more exclusive relationship, only to find that such early gains are outweighed by a lack of flexibility in realigning the service to ongoing changes in business outcomes.
The report also clearly points to the NAO’s views on the ‘big contract is now bad’, citing current government policies which now favour shorter agreements competed for by numerous smaller providers. While factually correct and a central driver for the current public sector remit, any change in policy needs to align with supporting business outcomes to ensure maximum value is achieved.
5. Commercial management of the contract
Another key point raised by the NAO. A lack of a strong intelligent client function can lead to an overdependence on your outsourced partner. This often results in a lack of control, failure to spot the early warning signs of deviations from outcomes and expectations, and an erosion of in-house knowledge and skills relevant to driving maximum value from an outsourced relationship. Recognising this, the NAO said that HMRC took a more hands-on approach after the first few years. But, while this counters the aforementioned issues, to have too much direct involvement in the ‘how’ of service delivery in an outsourced relationship, can relieve a vendor of their legal obligation to ensure that their solutions are fit for purpose. This in itself can materially derail and undermine the contractual protection you have.
6. Lack of progress towards replacing the Aspire relationship
The NAO report stated that: “HMRC faces a considerable challenge to reform the contract while developing a new approach to technology which is suitable for digital services. HMRC has been slow to develop its approach to replacing the Aspire contract.” The feeling is that more should have been done to develop a business case or project plan, and with the clock ticking down to the 2017 deadline (ending of the relationship), the strategy could be veering off-track. Add to this the NAO’s view that HMRC have not spent enough time analysing the strengths and weaknesses of their current arrangement and assessing the benefits achieved over the last ten years, and you get the clear impression that they feel vital information may well be missing that could make the post-Aspire transition far easier.
Core NAO recommendations
The NAO have made a series of core recommendations:
- “HMRC must urgently show how it will ensure its technology will meet its business responsibilities and risk appetite, as well as the Cabinet Office policy.”
- “HMRC should increase its control over ICT operational performance.” We have already expressed our views that care should be taken on this one for fear of relieving vendors of their legal responsibilities to offer adequate advice and guidance.
- “HMRC should urgently invest in its operational, technical and commercial skills.” Recruiting the right talent to adapt to new circumstances and responsibilities is key to success on any project.
- “HMRC should develop contingency plans as part of its risk management approach.” Transition from Aspire to whatever the post-Aspire landscape looks like, carries with it risk that can be adequately managed with detailed planning.
- HMRC should not only work with the Cabinet Office to make sure that all the skills and resources are in place for the change at the expiration of the Aspire contract, but successes should be shared for wider public sector benefit.
These are good recommendations. However, as we mentioned in our last article NAO reports seem to not make transparent the ‘how’ of what should be done to implement their recommendations. Identifying ‘what good looks like’ when it comes to the outcomes of these recommendations could go a long way not only to helping HMRC, but other public (and private) sector organisations.
Other points we would add to the NAO recommendations
1. Great value in an outsourced relationship needs great skills in your ICF team. The NAO report rightly identifies the need for HMRC to boost its in-house specialist skill base so vendor suggestions and adaptations can be adequately assessed and challenged where they need to be. To drive maximum value you need the talent to identify and clarify opportunities for innovation and the risks of deployment. Knowing that such resources are needed is one thing, but identifying the specific skills required, their roles in the process and the authority they will be given to make change is just as important. HMRC should spend a good deal of time determining the answer to this, but a starting point would be to review an article we wrote a while back about the skills required to develop an effective ICF team.
2. Build formal 6-monthly reviews and reshaping stages into your contract. Making all the right moves when a contract is up for renewal or replacement, or when a critical event occurs, is important. But it is a far better process to build adequate adaptability into your contract in the first place. Much has been made of the Aspire contract’s misalignment from current government policy, but more should be considered around its inflexibility to regularly align and realign to business goals as circumstances change. Business outcomes, smart KPIs and requirements should be formally reviewed at least every six months and the written contract terms should be realigned at the same frequency.
3. Outcome performance measurement. While input measurement – the analysis of the cost of everything you put into a project – is important because budgets are, after all, limited, it is far more critical to measure the outcomes of your relationship. Without this part of the equation, it is impossible to determine the value that you have or have not achieved as a result of an expense, and that is essential for commercial decision-making. Detailed outcome benchmarking should be built into any suggested strategy or contractual changes.
4. Expert responsibilities. There is a fine line between having the right skills in-house to monitor progress, identify weaknesses and develop relationships with your suppliers, and overstepping the mark to inadvertently relieve your provider of their responsibility to plan for, develop and maintain fit-for-purpose solutions on your project that drive maximum value. Your relationship management should encourage collaborative working without taking over, should align responsibility without finger-pointing, and should encourage the right behaviours from all parties.
The NAO have yet again produced a really insightful piece here in helping provide transparency over what is working well and where challenges exist. Credit should also go to HMRC for what appears to be a well-managed relationship. As we stated in our previous NAO article, it would be really helpful if the NAO could supplement its reports with more collaboration and implementation support for its recommendations between themselves, the Crown Commercial Service (CCS) and the Major Projects Authority (MPA). Their combined perspectives of analysis, insight and ‘hands-on’ knowledge of ‘how’ to initiate effective change would go a long way to help provide supporting implementation roadmaps that could drive much better value overall within major public sector strategic relationships.